Bond Definitions Flashcards
Ask price
Price security can be purchased for
Asset backed securities
Specific assets serve as collateral for a loan
Balloon PMT bond
bond where payment at the end is the largest
Basis Point
1/100th of a point or 0.01%
E.g. 90 bp = 90/100
Bid price
sale price investor receives from dealer,
Bid-ask spread
price security can be purchased for - price security can be sold for
Bond
IOU on debt, that pays back principal and interest
You get at least principal back sometime interest
Bond issuer
the original owner of the bond, that makes the payments and principal payment
Bondholder
the person who buys the bond and gets the interest payments
Collaterized Mortgage Organization
security backed mortgage
- Investor make payment to intermediary, that is repackaged as loan / mortgage. Investors have a right to those future CFs.
- Lender makes mortgage payment back to intermediary w interest, then it goes to investor.
No consequence in lenders do not pay mortgage
Duration
measures how long you get CF relative to market interest rates
Hedge Fund
Mutual fund for the rich that is not SEC regulated, less diversification but more exclusive investors
Load Fund
mutual fund with a charge either at purchase or at sale
Money Market Fund
open ended mutual fund, good for when inflation rates are high
rarely insured so buy government backed securities
can switch to other MF without charge
Mortgage
Loan collaterized by land / buildings
If borrower defaults, lender can sell the property and keep amount owed. Any excess goes to the borrower.
Municipal Bond
Debt of state / local government entity
Tax free at the federal level, taxable at state level if you live in that state
Better for the rich because of tax breaks, even with lower yields
Mutual Fund
Fund operated by an investment company that raises $ from shareholders / investors to invest in a variety of assets
Risk levels vary
No load fund
Mutual fund offered by an open end investment company, with no sales charge
No broker involvement
Perpetual bond
Bond version of a perpetuity
No maturity date and not redeemable
Zero Coupon Bond
No periodic interest payments, redeemed on maturity date
Owe taxes income accrued each year
Good for specific goals e.g. college planning
Zero Coupons and Interest
More fluctuation when interest rates rise because they do not pay interest
When interest rates are falling zeros are more valuable because their interest rate is locked in
Bonds in rising interest rates
Sell / short because prices will go down because y is the denominator
Bonds at low interest rates
Price will be higher so better to try and buy before interest rates fall
Interest rates and duration / TTM
Bonds with longer durations / TTM are better
